Companies are increasingly looking to buy carbon credits to offset their greenhouse gas emissions and potentially reduce their carbon tax liabilities. Large emitters in Singapore are exploring this with new vigour given that the country’s carbon tax will be raised in coming years. In turn, the local carbon credit market is gearing up to meet demand, with new trading platforms being established.
Those trading carbon credits must ensure that they understand the tax consequences of their transactions in terms of both goods and services tax (GST) and direct tax.
Large emitters taxed in their purchase of carbon credits could pass on costs to their customers and the general public. Carbon exchanges may also face a dilemma over whether to bear the tax costs associated with their trading or pass them on to buyers. The Government may wish to consider exempting carbon trading from GST, as other countries have done.
Singapore's carbon tax outlook
Demand for carbon credits will increase among emissions-intensive enterprises, such as petrochemical companies, when Singapore hikes its carbon tax from 2024.
While Singapore set its initial carbon tax rate at $5 per tonne of CO2 equivalent (tCO2e) generated — a significantly lower rate than envisioned — when it was introduced in 2019, the tax will soon increase over three phases. It will rise to $25 in 2024 and to $45 in 2026, before increasing to between $50 and $80 per tC02e by 2030.
Singapore carbon tax rate
The current GST treatment of voluntary carbon credits traded in Singapore may affect market uptake on account of tax cost. Businesses should be aware of these costs before participating in the market. The Government could clarify the GST treatment of carbon trading and, if desired, provide clear exemption categories in order to foster Singapore’s carbon credit market.
Check out our full report for an in-depth Q&A on GST implications of carbon trading in Singapore.
Direct tax implications of carbon trading
The application of direct tax to carbon trading in Singapore is clearer cut than GST, with the basic concepts of corporate taxation in Singapore applying to the trading of carbon credits.
For a company trading carbon credits, related income and gains would simply be regarded as revenue and would be taxable. Accordingly, associated expenses incurred would generally be regarded as tax-deductible business expenses.
The Inland Revenue Authority of Singapore has provided clarifications which are helpful for taxpayers and signals the Government's commitment to enhance Singapore's position as a carbon trading hub.
Carbon credits are also included as qualifying products under Singapore’s Global Trader Programme incentive, which provides for reduced tax rates on trading income. This is good news for commodity traders who are considering Singapore as a potential location for their carbon trading desks.
How we can help
With the increasing urgency to reduce emissions and reach national net-zero targets by 2050, Singapore’s carbon trading market will continue to grow.
Our tax teams at KPMG in Singapore are well-positioned to partner with you in your journey towards environmental sustainability. We help to increase your awareness of the carbon trading tax landscape, identify opportunities for tax optimisation and ensure that you comply with the relevant laws and regulations.